Lead, follow or get out of the way!
Recently, correspondent lenders across the board have pulled back drastically on their pricing for all loans that they previously purchased for securitization purposes. The best execution prices for GNMA loans have seen an average of a -3.5-point drop in pricing for loans bid by the winning investor when compared to pre-crisis levels! This is shear madness as the value of GNMA servicing could not possibly be affected by the announced forbearance measures being implemented by GNMA, FNMA, or FHLMC by the changes seen. Nor would the value impact of a sustained slowdown change that value by as much as the pricing has dropped. In an extreme example, the price paid for an FHA 30 year with a below 620 FICO dropped 11 points based on a wide “net” Bulk execution priced on 3/31/2020. The average FHA/VA loan was down by 3.5 points versus pre-crisis levels. For actual/actual based cash window servicing the value has also dropped but appears to be down only 75 basis points on average, IF you can find a company to buy it. Also ridiculous from a perceived cost versus impact basis as no payments are made by the servicer under actual/actual remittance until received from the borrower.
Why has this pricing change occurred? The primary reasons are lack of cash to support the level of estimated forbearance payments and increased servicing costs to handle the forbearance, late payments and increased foreclosures that will result from this period. However, a back-of-the-envelope calculation of the increased costs for GNMA loans ranges from -27 basis points to -57basis points for the average loan, not -3.5 points. So increased costs are not the primary driver, but it is cash available to service the loans and the avalanche of new business driven by lower rates before the implosion. How much? At an estimated 30% forbearance for 6 months payments on a $10 billion servicing portfolio, we estimate that the servicer will need an additional $60 to 100 million to cover the missed insurance and principal payments depending on remittance cycle and additional costs assuming at a 3% forbearance borrowing rate. A higher forbearance % level or interest rate will increase that estimate proportionately. Scheduled / Scheduled servicing will need more cash to forward both scheduled principal and interest payments, scheduled / actual will require just interest and actual principal payments, and actual / actual remittance requires just what is collected. Loans with impounds will also need more cash. If the agencies announce that all mortgagees are eligible for a payment vacation/forbearance then the industry will be in big trouble without a correspondingly large liquidity fund available to all servicers. Borrowers should have to attest to their hardship to receive forbearance.
On the optimistic side a 3 month forbearance period on average with 15% needing the funds would be much better than what is currently being estimated.
Hence, when the US Treasury provides independent mortgage bankers and large servicers with a line to fund this massive funding requirement who will lead, follow or get out of the way?
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